Conforming Loan Limit Increase to be Part of Stimulus Package

Last updated on November 2nd, 2010

The economic stimulus package will include an overhaul of the Federal Housing Administration’s mortgage insurance program and an increase in the size of loans that mortgage financiers Fannie Mae and Freddie Mac can purchase, House Financial Services Committee Chairman Barney Frank told reporters today.

In a somewhat surprising move, the conforming loan limit, currently set at $417,000, is expected to rise to a maximum loan amount of $730,000 in some parts of the country as part of the fiscal plan.

It is believed that the new limits for FHA loans and conforming loans will be 125 percent of the median area home price, capped at $730,000 in the country’s most expensive housing markets, and higher than the $625,000 cap mortgage bankers and legislators had been aiming for.

The current $417,000 conforming loan limit for Fannie and Freddie along with FHA limit of $362,000 has made it more difficult for homeowners to obtain financing in costlier housing markets because of the virtual lack of a secondary market for such securities.

The hope is that the easing of the loan limits will allow homeowners in more expensive housing markets to obtain more favorable financing, which in turn should promote sales and uphold home prices.

To give you an example of the interest rate spread between conforming loans and jumbo loans, the average rate on a 30-year fixed-rate mortgage for a jumbo at Wells Fargo is 7.125% compared to 5.875% on a conforming loan, all things the same.

The loan limit increase would only be temporary however, applicable for only one-year.

Mortgage Bankers Association Reaction

Kieran P. Quinn, CMB, Chairman of the Mortgage Bankers Association released the following statement regarding the news:

This stimulus package will bring much-needed help to consumers and restore some stability to the housing and mortgage markets. Reform of the Federal Housing Administration (FHA) has long been a top MBA priority. A more modern and vigorous FHA will provide another option for first time and low and moderate income borrowers and borrowers who need to refinance existing mortgages.

A temporary increase in Fannie Mae and Freddie Mac’s loan limits, as well as a boosting of the FHA loan limit should return liquidity to a portion of the mortgage market that has essentially been at a standstill since August. This will be especially helpful to current and potential homeowners in areas of the country that have seen the largest price run ups during the recent boom. It is not coincidental that many of these areas are the same ones that are now facing the most difficulty.

All these provisions should provide a boost for struggling borrowers and the stalled housing market. We are pleased to see that leaders on both sides of the aisle on Capitol Hill have indicated the measure will receive swift action and we look forward to seeing the package signed into law as soon as possible.”